Zhang Qiyao from Industrial Bank: It is still too early to discuss stagflation; the market may welcome a counterattack opportunity after the Middle East negotiations take effect

The geopolitical disputes in the Middle East surrounding the U.S., Israel, and Iran have persisted for several weeks without a complete resolution, leading to significant fluctuations in international oil prices and raising concerns in the investment market. At the same time, China's economy has once again demonstrated resilience. How should we assess the trends in international geopolitics, the economy, and even commodity and energy prices, and what should be our judgment on Chinese assets? Zhang Qiyao, Chief Strategy Analyst at Industrial Securities, recently addressed these questions and specifically shared his predictions for the A-share market in the second quarter. Zhang Qiyao believes that the geopolitical situation in the Middle East and the direction of oil prices historically often go through four stages. Currently, there are no settled signs, but there is a certain probability of reaching a compromise in April or May this year, which may constitute an opportunity for market reversal. Although there are many opinions on what the central value of future oil prices might be and what impact it could have on the global economy, Zhang Qiyao believes it is still too early to discuss stagflation. Many people, due to "muscle memory," compare the current situation with the 2022 Russia-Ukraine conflict, but overlook the completely different background and conditions of this round of inflation. He also believes that once the geopolitical conflict passes, the asset allocation logic for 2026 will face changes. The core driving force behind the general rise of global stock markets over the past two years will no longer be present. The likelihood of global central banks easing monetary policy will probably decrease, which will also introduce new variables for the next phase of market performance. Key Quotes: In past instances of global geopolitical turmoil and rising oil prices, the market often goes through four stages: the first stage is panic trading, the second stage is reversal trading, the third stage is stagflation trading, and the fourth stage is directional choice. The most important factor determining asset prices is essentially the timing and persistence of rising oil prices. If oil prices continue to operate at high levels and form a new central value, it will lead to sustained tightening of policies, which will have a more lasting impact on the market, asset prices, and policies. Another important factor directly related to oil prices is policy response. If faced with high oil prices, the policy choice prioritizes addressing inflation pressure and tightens significantly, it may lead to economic recession and downturn; conversely, the impact may be smaller. Reversal will not happen overnight; a true reversal requires waiting for the resolution of two core issues: when the geopolitical conflict will end; and concerns about stagflation and expectations of policy tightening triggered by the geopolitical conflict. The vast majority of professional investors believe the current market bottom is around 3,700 points, with the next high distribution around 3,800 points. Overall, even on the most pessimistic and panic-stricken days in the market, there is still considerable confidence in the market bottom between 3,700 and 3,800 points. It is still too early to discuss stagflation. Many people, due to "muscle memory," compare the current situation with the 2022 Russia-Ukraine conflict, while this round of inflation is completely different. As the intensity of geopolitical conflict decreases and negotiations take place, market risk appetite will begin to recover. The 3,700 to 3,800 points range is already a bottom area, and after negotiations are finalized, the market will experience a smooth counterattack. The asset allocation logic for 2026 will face changes. In 2026, A-shares can only earn profits. Earning profits will be relatively challenging We need to be wary of the seasonal decline in the cycle of price increases. Commodity prices and related stocks exhibit significant seasonality, typically rising in March and April, experiencing a downturn in the off-season in May and June, and then rising again from July to September. Using the first person, some content has been abbreviated. Market Reaction Patterns After Geopolitical Conflicts and Oil Price Increases In the first quarter, everyone should have deeply felt the market's ups and downs. After the rise at the beginning of the year, March experienced geopolitical turmoil and war conflicts, leading to market adjustments. Looking ahead, what will the market's state be? How should we view the impact of this round of geopolitical turmoil and rising oil prices on the market? First, we recently conducted a review. What has been the market's reaction every time geopolitical conflicts led to rising oil prices? What impact does it have on global asset prices? Let me briefly introduce the conclusions. During past instances of global geopolitical turmoil and rising oil prices, the market often goes through four stages. The first stage is panic trading. When war breaks out, asset prices generally decline due to risk aversion. The second stage is reversal trading. When people realize that the war may not be as frightening, or anticipate that the conflict will soon ease, the market will rebound. The third stage is stagflation trading. If it becomes apparent that the war cannot be resolved in the short term, and the geopolitical conflict ultimately leads to rising oil prices, resulting in a stagflation environment, the market will enter a more difficult phase. The fourth stage is directional choice. Once the war conflict is ultimately settled and its impact on the fundamentals begins to manifest, the market will make a directional choice. If the fundamentals weaken at this time, with a significant rise in oil prices due to the war, tightening policies, and a deteriorating economy, the market will decline; conversely, if the war is short-lived, with oil prices rising sharply and then retreating, and policies remain relatively loose, with the economy maintaining an upward trend, the market will perform well. This is the basic performance and response pattern of the market after each rise in oil prices. The Most Important Factors Determining Asset Prices In our review, we reached several important conclusions. The first conclusion is that the most important factor determining asset prices is essentially the duration and persistence of rising oil prices. If oil prices remain high for an extended period, such as during the first oil crisis when prices rose from $2 to $10 and formed a new central point, the impact on the market, asset prices, and policies will be more lasting. Conversely, if oil prices only experience short-term spikes, like during the Iraq War, and then retreat after six months, the impact on the market will be relatively small. The second important factor directly related to oil prices is policy response. The policy response is highly correlated with the magnitude and persistence of rising oil prices. If faced with high oil prices, if the policy choice prioritizes addressing inflation pressures and tightens significantly, it may lead to economic recession and downturns, negatively impacting asset prices. For example, during the first two oil crises in 1973 and 1978, as well as during the 2022 Russia-Ukraine conflict, the Federal Reserve chose to tighten policies, ultimately leading to a deep adjustment in global asset prices However, there are also different situations. If the policy considers that both oil prices and inflation are controllable, and does not significantly tighten in response to inflation as the main contradiction, but continues to prioritize stable growth, then the economic fundamentals will not face major issues, and the performance of the capital market will also be acceptable. For example, during the third oil crisis in 1990, the Iraq War in 2003, and the Libyan civil war, the policy did not overly worry about rising oil prices and inflation. From an industry perspective, sectors such as consumption, pharmaceuticals, technology, finance, and real estate continued to recover in the medium to long term after experiencing short-term suppression. The third influencing factor is relatively minor, but it can have a significant impact at different times, which is valuation, that is, the stock price position of the market itself. For instance, comparing the two periods of policy tightening in history, the 1978 oil crisis and the 2022 Russia-Ukraine conflict. During the 1978 oil crisis, stock market valuations were at historically low levels, so even with policy tightening, the stock market ultimately performed well, and the adjustment during the panic trading period was not deep. In contrast, during the 2022 Russia-Ukraine conflict, the Federal Reserve also entered a rate hike cycle, but at that time, U.S. stock valuations were at historically high levels. The strongest companies in the U.S. stock market in 2021 were referred to as "FAANG," with valuations reaching fifty to sixty times, resulting in an overall high market level. Therefore, once interest rate hikes occurred, the impact on U.S. stocks was extremely severe. In summary, looking ahead to the impact of the current rise in oil prices and geopolitical conflicts on the market, the core focus is on three levels. First, the persistence of the impact of geopolitical conflicts on oil prices; second, whether it will fall into stagflation; third, the policy response. Most on-site investors maintain or even increase their positions The second part is an outlook on the current market. Before that, let me introduce a survey result, the conclusions of which we will repeatedly refer to later. Recently, we conducted a questionnaire survey targeting domestic institutional investors, which may be one of the most comprehensive and authoritative surveys in the history of A-shares. The respondents were mainly institutional investors, with 70% being public funds, 26% being insurance asset management, and some private equity and bank wealth management fund managers, research leaders, and macro strategy analysts. This survey questionnaire was released on March 23, which was (recently) the most brutal day for the market, with the Shanghai Composite Index briefly falling to around 3,790 points. We asked everyone, where do you think the bottom of the current market is? The vast majority of professional investors believe that the current market bottom is around 3,700 points, with the next highest distribution around 3,800 points. Overall, even on the most pessimistic and panic-stricken day for the market, there is still considerable confidence in the market bottom between 3,700 and 3,800 points. The second question is, what kind of position operation do you prefer to carry out in the next month? We divided the respondents into three categories: relative return investors, mainly public funds, absolute return investors, and respondents with no equity positions. For those with positions, the highest proportion of choices was "maintain the position unchanged, but adjust the structure," with some choosing "completely maintain the existing position and structure," and even some absolute return investors choosing to "increase positions." At that time's market position, institutional investors generally believed that there was no need for significant changes in positions, and reducing positions was an option for very few people Interestingly, respondents without equity positions, such as some researchers or analysts, tend to reduce their positions. This is easy to understand; "a gentleman does not stand under a dangerous wall." From a recommendation perspective, it is normal to lower positions to avoid risks. However, those who actually hold funds and are in the market believe that they should maintain or even increase their positions. This indicates that the market has shown strong resilience at the previous low levels, and investors believe that the chips in their hands have sufficient safety cushions and attractiveness. In the third dimension, we have constructed a very interesting indicator, the proportion of stocks above the 30-day moving average. On the lowest point of March 23, this proportion had fallen below 10%. Many people view the 30-day moving average as the dividing line between bull and bear markets. When this proportion falls below 10%, it means that over 90% of stocks have entered a bear market state. Historical reviews show that every time this indicator drops below 10%, it basically means that the market has reached a phase bottom. The last time this occurred was in April 2025, when Trump sparked a trade war and imposed high tariffs, leading to a rapid market adjustment, and this indicator fell below 10%. Subsequently, the market quickly bottomed out and rebounded. Therefore, this indicator also provides us with confidence in judging that the current position is a bottom. Reversals are never instantaneous Objectively speaking, although we hope that a reversal has occurred, at the current point in time, subsequent geopolitical negotiations and turmoil may still face twists and turns; reversals are never instantaneous. A true reversal requires the resolution of two core issues: First, when will the geopolitical conflict end; second, concerns about stagflation triggered by the geopolitical conflict and expectations of policy tightening. Next, we will separately look ahead to these two main contradictions. First, regarding geopolitical issues. We tend to believe that the probability of reaching a compromise in negotiations in the medium term (such as in April or May) is relatively high. From several dimensions, first, observing the actions of the U.S. side, troops have been deployed and landing ships have been stationed, even beginning to strike chemical plants and civilian facilities on Hark Island. When they take such extreme pressure tactics, we believe that negotiations are not far off. Second, from a historical perspective, the most severe period of U.S.-Iran conflict was in 1978 and 1979. In the face of a series of crises, the U.S. only imposed an oil embargo and did not send troops. Since they did not engage in war back then, the probability of the U.S. launching a large-scale ground war now is extremely low. We believe that although the negotiation process will be full of ups and downs, and we cannot rule out the possibility of negotiations breaking down and conflicts reigniting in the short term, both sides will ultimately return to the negotiating table. It is too early to discuss stagflation The second issue is the concern about stagflation. Stagflation refers to the coexistence of economic recession and inflation, which is a poor macro environment. In a bad economy, monetary policy should be relaxed, but inflation limits easing, putting policymakers in a dilemma. Therefore, stagflation is usually accompanied by tight monetary policy, which is unfavorable for the capital market. However, it is too early to discuss stagflation at this time. Many people, due to "muscle memory," compare the current situation with the 2022 Russia-Ukraine conflict, when the war led to a surge in oil prices, and the Federal Reserve aggressively raised interest rates, ultimately causing significant declines in both U.S. and A-shares. But this is related to the situation back then. Before the 2022 Russia-Ukraine conflict, the U.S. CPI had already reached 5% The reason is that after the pandemic, the United States implemented large-scale fiscal stimulus ("helicopter money"), combined with post-pandemic recovery, making inflation difficult to control. The war and rising oil prices are merely catalysts; due to the ample funds in residents' hands, high oil prices are smoothly transmitted downstream, forcing the Federal Reserve to aggressively raise interest rates. This round of inflation is completely different. First, the current CPI in the United States is only 2.4%, which is low. Second, even under aggressive assumptions, if oil prices remain at $100 this year, the expected CPI in the U.S. by the end of the year will only be 3.5%. The inflation rate is still within a reasonable range and does not constitute systemic tightening pressure. Therefore, this round of inflation in the U.S. is overall controllable. For China's A-shares, inflation is even less of a problem. There has been no inflation pressure in the domestic market in recent years, with the recent PPI just turning positive and the CPI also at a low level, which will not impact monetary policy. Therefore, it is too early to discuss this round of stagflation. This is not the final baseline scenario. As the intensity of geopolitical conflicts decreases and negotiations take shape, market risk appetite will recover, and concerns about stagflation will ease, allowing the market to launch an upward counterattack. Of course, it is still unknown whether the negotiations will be fully realized, but the 3700 to 3800 point range is already the bottom area, and after the negotiations are finalized, the market will welcome a smooth counterattack. In 2026, A-shares can only earn profits Once the geopolitical conflicts are over, the asset allocation logic for 2026 will face changes. In the past two years, global stock markets have generally risen, with the core driving force being the valuation increase brought about by the Federal Reserve's loose liquidity spillover. However, 2026 will be different; although the war may end, global central banks, including the Federal Reserve, will likely reduce the degree of monetary policy easing, possibly transitioning from "easing" to "marginal tightening." This means it will be difficult to earn valuation gains this year. With limited valuation increases, A-shares in 2026 can only earn profits. Earning profits will be relatively challenging. We conducted a survey on this in our questionnaire. The predictions of respondents for this year's Shanghai Composite Index returns are mostly concentrated in the 5-10% and 0-5% ranges; similarly, the mainstream expectations for this year's profit growth across all A-shares are also highly concentrated in these two ranges. These two indicators are highly consistent, indicating that institutional investors have reached a consensus that it will be difficult to earn valuation gains this year, and they must focus on corporate profit lines. This is also an objective change that exists this year. April is the most effective window period for the "profit factor" throughout the year So, which sectors have good profits? How should we respond and judge the structure? After the outbreak of the war in March, the market chose three directions for hedging. First, the technology sector with the strongest performance and highest prosperity, such as North American computing power chains, optical modules, storage, and other hard technologies; second, the energy security and alternative sectors, such as new energy, coal, public utilities, gas, and agricultural products; third, defensive sectors, such as banks, food and beverages, and infrastructure. Looking ahead, funds will gradually tilt towards the first direction, which is performance certainty and high prosperity. There are two reasons for this. First, as time goes by, the probability of reaching negotiations increases, and the weight of geopolitical conflicts in asset pricing will decrease. Second, investors are tired of being disturbed by unpredictable geopolitical news and tend to skip the speculative process, directly laying out positions in the most reliable performance sectors In addition, April is the most effective window period for the "profit factor" throughout the year. Institutional investors typically engage in cyclical investments, seeking assets with high prosperity and high profitability. However, the effectiveness of the profit factor varies across different time periods. For instance, at the end of the year or in February, the market tends to favor thematic speculation, resulting in a lower correlation with performance. By April, with the disclosure of annual reports and first-quarter reports, incremental information prompts the market to make a "April decision," often establishing the main theme for the second quarter. During this period, the explanatory power of the profit factor on stock prices is the strongest. Against the backdrop of profitability becoming the main theme, we have identified four sub-sectors that have seen upward revisions in profit forecasts since the beginning of the year. The first is AI hardware, including consumer electronics, communication device components, computer equipment, electronic chemicals, and software such as gaming; the second is advanced manufacturing and overseas supply chains, including various links in new energy, photovoltaics, military and maritime, commercial vehicles, and machinery; the third is the cyclical price increase chain, including non-ferrous metals, steel, fiberglass, coal, transportation ports, and gas; the fourth is consumption and finance, including some discretionary consumption and new consumption sectors such as retail, hospitality, agricultural products, and brokerage firms. These are sectors expected to exceed expectations in the first quarter reports. If a particular sector realizes performance concentrated in the first quarter reports, it will show corresponding performance. Further refining our selection, we are looking for industries with good first-quarter report performance that have previously been undervalued or have seen significant declines, mainly concentrated in the semiconductor sector of the AI industry chain, domestic computing power, PCBs, and downstream gaming and consumer electronics; new energy and military in advanced manufacturing; non-ferrous chemicals, steel, and fiberglass in cyclical stocks; service consumption and new consumption; as well as brokerage firms in non-bank financials. Based on the fund manager survey questionnaire, the industries most favored for the first quarter reports are ranked as follows: first is North American computing power and optical modules; second is domestic computing power, storage, and semiconductors; third is new energy, military, and robotics; fourth is upstream resource products such as oil, natural gas, coal, and non-ferrous metals. The above is our short-term analysis of sub-sectors based on the earnings season. The TMT sector has a relatively high win rate in May and June Looking ahead to the market in May and June, we have projected three scenarios. The first scenario is that the war comes to an end, negotiations ease, oil prices fall, and policies return to a conventional easing tone. At this point, the market will return to the high prosperity technology growth track. The second scenario is that the war drags on, oil prices remain high, and policies prioritize anti-inflation. This is a more pessimistic scenario where the resource energy sector strengthens, but technology and other industries are suppressed. The third scenario is that the war continues, oil prices are high, but policies still choose to stabilize growth and ease. In this case, the market will be driven by both growth in prosperity and anti-inflation energy. Among these three scenarios, we believe the first scenario has the highest probability of occurring, namely that policies will return to a stable easing, and the market's main theme will revert to the technology growth track. Finally, we would like to add two calendar effects worth noting in May and June for your reference. First, be cautious of the seasonal decline in the cyclical price increase chain. The price increase chain was very strong in the first two months of this year, and the outbreak of war further pushed up oil and commodity prices. However, reviewing the past 10 years, commodity prices and related stocks exhibit significant seasonality, typically rising in March and April (the "golden three silver four" stocking period), declining in the off-season of May and June, and rising again from July to September (the "golden nine silver ten") Even in 2021, the year of soaring resource prices like coal, the second quarter experienced fluctuations and corrections. If geopolitical negotiations lead to a drop in oil prices, the suppression of resource products will be more evident. Secondly, the TMT sector has a relatively high win rate in May and June. Some believe that historically, the consumer sector performs better in May and June, but this is not determined by the attributes of the sector; rather, it is because the core consumer assets at that time have the most stable earnings, making it less likely for performance to fall short of expectations. In recent years, the best-performing sector during earnings season has shifted to technology hardware, such as optical modules, computing power, and overseas chains. At the same time, influenced by the U.S. stock market, the Philadelphia Semiconductor Index has shown a seasonal pattern of two waves of increases in the middle and end of the year over the past decade, giving the technology sector a strong advantage in the second quarter. Overall, the market style pendulum will swing back in the second quarter. The first two months of the first quarter were dominated by the price increase chain, while March saw a shift towards energy and anti-inflation products due to risk aversion; subsequently, as risks materialize, the style will swing back towards technology, high prosperity, overseas, and AI. The win rate for the technology prosperity theme in the second quarter will be higher. Risk Warning and Disclaimer The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at your own risk